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[No. 2012-N-13]
State-Level Guarantee Fee Pricing
AGENCY: Federal Housing Finance Agency.
ACTION: Notice; input accepted.

The Federal Housing Finance Agency (FHFA) oversees the operations of Fannie
Mae and Freddie Mac (the Enterprises). The Enterprises are in conservatorships, and,
as Conservator, FHFA has statutory obligations in its conduct of the conservatorships,
including preserving and conserving assets. Though the Enterprises are congressionally
chartered and federally supervised and regulated, state laws and practices can have a
significant impact on their loan default costs.
This Notice sets forth an approach to adjust the guarantee fees (g-fees) that the
Enterprises charge for mortgages that finance properties with one to four units (single-
family mortgages) in certain states to recover a portion of the exceptionally high costs
that the Enterprises incur in cases of mortgage default in those states.
The Enterprises charge g-fees to compensate for the credit risks they undertake
when they own or guarantee mortgages. The g-fees the Enterprises currently charge on
single-family mortgages vary with the type of loan product and with loan and borrower
attributes that affect credit risk. FHFA has a responsibility to ensure that those fees are
proper and adequate. The single-family g-fees that the Enterprises charged prior to
conservatorship proved inadequate to compensate for the level of actual credit losses they
experienced. This contributed directly to substantial financial support being provided to
the two companies by taxpayers.
G-fee payments to Fannie Mae and Freddie Mac generally include both ongoing
monthly payments and an upfront payment at the time of Enterprise loan acquisition.
Current Enterprise schedules for upfront g-fees may be found at and
Recent experience has shown a wide variation among states in the costs that the
Enterprises incur from mortgage defaults. This is due, in large part, to differences among
the states and territories in the requirements for lenders or other investors to manage a
default, foreclose, and obtain marketable title to the property backing a single-family
mortgage. Foreclosure takes longer than average in some states as a result of regulatory
or judicial actions. Further, in some states the investor cannot market a property for a
period after foreclosure is complete. There is also variation among the states in the per-
day carrying costs that investors incur during the periods when a defaulted loan is non-
performing and, in some states, when a foreclosed property cannot be marketed. Those
variations in time periods and per-day carrying costs interact to contribute to state-level
differences in the average total carrying cost to investors of addressing a loan default.
Because the Enterprises currently set their g-fees nationally, accounting for expected
default costs only in the aggregate, borrowers in states with lower default-related carrying
costs are effectively subsidizing borrowers in states with higher costs.
The principal drivers of differences across states in the average total carrying
costs to the Enterprises of a defaulted single-family mortgage are, in order of
1. the length of time needed to secure marketable title to the property;
2. property taxes that must be paid until marketable title is secured; and
3. legal and operational expenses during that period.
There is a wide variation among states in all three of those variables.
In light of these cost differentials, FHFAs March 2012 Conservatorship
Scorecard set forth the objective for Fannie Mae and Freddie Mac of developing
appropriate risk-based guarantee fee pricing by state. FHFAs proposal described here
would adjust the upfront fees that the Enterprises charge when they acquire single-family
mortgages in states where Enterprise costs that are related to state foreclosure practices
are statistically higher than the national average. The size of the adjustments would
reflect differences in costs in those states from the average.
FHFA recognizes that the data the Enterprises have used to calculate state-level
cost differences in this proposal are based on a combination of Enterprise experience and
estimation. Actual costs incurred by the Enterprises in the future may vary over time and
among individual defaults within a state. Because of this variability, FHFAs planned
approach focuses on five states that are clear outliers among states in terms of their
default-related costs.
This document outlines the approach that FHFA is considering and discusses
potential additions and changes to the calculation of such fees in the future. Through this
Notice, FHFA is providing an opportunity for public input on these subjects. After
reviewing the public input and determining a final state-level guarantee fee pricing
method, FHFA expects to direct the Enterprises to implement the pricing adjustments in
Approach to State-Level G-Fee Adjustments
The approach set forth in this Notice is based on Enterprise experience and does
not include the forward-looking impact of recently-enacted state and local laws that may
increase the Enterprises costs. FHFA intends to periodically reassess state-level pricing
based on updated Enterprise data. The agency may include the impact of newly-enacted
laws if they clearly affect foreclosure timelines or costs, where such costs may be
reasonably estimated based on relevant experience.
FHFAs approach would focus on the small number of states that have average
total carrying costs that significantly exceed the national average and, therefore, impose
the greatest costs on Fannie Mae, Freddie Mac, and taxpayers. Mortgages originated in
these highest-cost states would have an upfront fee of between 15 and 30 basis points,
which would be charged to lenders as a one-time upfront payment on each loan acquired
by the Enterprises after implementation. Based on current data as described below, those
five states are Connecticut, Florida, Illinois, New Jersey, and New York.
Lenders may pass an upfront fee through to a borrower as an adjustment to the
interest rate on the borrowers loan. Because the upfront fee is paid only once, its impact
on the annual interest rate is much smaller than the upfront fee itself. Dividing the
upfront fee by five provides an approximation of the potential impact on the interest rate.
To illustrate, a 15 basis point upfront fee, if fully passed through by the lender, would be
roughly equivalent to an increase in the annual interest rate of three basis points. Under
FHFAs planned approach, a homeowner in an affected state obtaining a 30-year, fixed-
rate mortgage of $200,000 could see an increase of approximately $3.50 to $7.00 in his or
her monthly mortgage payment, reflecting a range of upfront fee adjustments of 15 to 30
basis points.
The methodology used by the agency to develop the planned approach addresses
only differences in the expected cost of defaults associated with single-family mortgages
that will be acquired by the Enterprises in the future and are underwritten according to
current standards. If FHFA had developed an approach using information on the realized
default losses on loans the Enterprises acquired in the past decade, which were originated
under less stringent underwriting guidelines, the increases in upfront fees in the states
affected would be significantly greater, because recently acquired mortgages are expected
to default at lower rates due to strengthened underwriting standards.
The methodology used to develop the planned approach to state-level g-fee
pricing relies on three key factors. The first is the expected number of days that it takes
an Enterprise to foreclose and obtain marketable title to the collateral backing a mortgage
in a particular state. The second is the average per-day carrying cost that the Enterprises
incur in that state. The third is the expected national average default rate on single-family
mortgages acquired by the Enterprises. To estimate the magnitude of the state-level
differences in average total carrying cost, the estimation assumes that loans originated in
each state will default at the national average default rate.

The table below, titled Estimated Time to Obtain Marketable Title and Cost per
Day Relative to the National Average, provides information on the time periods and
costs used to develop the proposed fees. The column titled Foreclosure Timeline in
Days shows, for each state, the target number of days after the last paid installment on a
mortgage for a loan servicer to complete the foreclosure sales process. Those timelines
are published in each Enterprises servicing guide and are reviewed and updated as
necessary every six months. The timelines shown in the column were published in June
2012 at
s.pdf and
The timelines are periods within which Enterprise servicers are expected to complete the
foreclosure process for mortgages that did not qualify for loan modification or other loss
mitigation alternatives. The timelines are derived from an analysis of the Enterprises
actual experience with foreclosure processing in each state, adjusted for existing statutory
requirements and certain changes in law or practice during the historical period. The
published timelines also take into account the effects that foreclosure moratoriums or
other extenuating circumstances and lender-specific delays outside the expected norms
for that state may have had on actual foreclosure timelines.

Estimated Time to Obtain Marketable Title and Cost
per Day Relative to the National Average
Timeline in
Days 2/
Estimated Average
Time in Days
Total Time to Obtain
Marketable Title in
Cost per Day Relative
to the National
Average 3/
(Total Time *
Cost) 4/
AK 300 0 300 93% 11
AL 270 0 270 93% 2
AR 280 0 280 102% 13
AZ 300 0 300 84% 3
CA 300 0 300 90% 7
CO 330 0 330 85% 12
CT 690 0 690 109% 52
DC 300 0 300 86% 5
DE 480 0 480 83% 27
FL 660 0 660 111% 51
GA 270 0 270 101% 9
GU 500 0 500 100% 38
HI 500 90 590 79% 35
IA 480 0 480 110% 42
ID 440 0 440 88% 26
IL 480 60 540 118% 50
IN 480 0 480 107% 40
KS 330 90 420 108% 33
KY 420 30 450 97% 32
LA 390 0 390 106% 29
MA 350 0 350 97% 22
MD 485 120 605 97% 49
ME 570 0 570 95% 44
MI 270 180 450 118% 43
MN 270 180 450 96% 30
MO 270 0 270 109% 17
MS 270 0 270 107% 14
MT 360 0 360 88% 20
NC 300 0 300 91% 10
ND 405 60 465 109% 39
NE 330 0 330 114% 25
NH 270 0 270 110% 18
NJ 750 0 750 113% 53
NM 450 60 510 91% 34
NV 360 0 360 83% 19
NY 820 0 820 112% 54
OH 450 30 480 114% 45
OK 420 0 420 104% 31
OR 330 0 330 88% 16
PA 480 0 480 108% 41
PR 720 0 720 68% 37
RI 330 0 330 107% 23
SC 420 0 420 95% 28
SD 360 180 540 105% 46
TN 270 0 270 96% 6
TX 270 0 270 132% 24
UT 330 0 330 82% 8
VA 270 0 270 87% 1
VI 510 0 510 93% 36
VT 510 30 540 105% 47
WA 330 0 330 88% 15
WI 480 30 510 113% 48
WV 290 0 290 87% 4
WY 270 120 390 86% 21
National Average
(UPB Weighted)
396 17 413 100%
1/ Includes the District of Columbia and certain U.S. territories. The Enterprises do not currently acquire loans in the Northern Mariana Islands or American
2/ Foreclosure time frames are available online at:
3/ Cost per day is expressed as an index relative to the UPB-weighted national average, where 100% represents the average cost. It excludes HARP loans.
4/ Rank is a function of the total time to obtain marketable title multiplied by the indexed cost. The product for each state is indicative of the relative total carrying
cost upon which FHFA would base its adjustments to upfront fees. "1" represents the lowest-cost area and "54" the highest-cost area.

The column titled Estimated Average Unable-to-Market Time in Days shows
Enterprise estimates of the additional time after the foreclosure sale date in certain states
before an Enterprise can begin to market and sell the property. These additional periods
of time are often due to a statutorily set post-foreclosure redemption period that allows
a borrower to redeem or recover the property by paying off the defaulted loan, or are due
to other court-mandated procedures that otherwise prevent an Enterprise from marketing
and selling the foreclosed property. These time estimates were based on recent
Enterprise experience and state law.
The column titled Total Time to Obtain Marketable Title in Days provides the
sum of the number of days shown in the two preceding columns, which equals the
estimated average length of time from the date of the last mortgage payment to the date
on which the foreclosed property is eligible to be marketed for sale. Although these
times are based on recent data, they do not reflect changes to state laws that have not
been in effect long enough to influence the foreclosure timelines published by the
The second factor used in the estimation is the per-day carrying cost incurred by
the Enterprises on non-performing loans, which varies across the states. That cost
includes property taxes, legal expenses, hazard insurance, costs related to maintenance
and property repairs, and the Enterprises costs of financing a non-performing mortgage.
These costs were estimated using recent data. State and local government decisions can
significantly affect the carrying cost per day, especially with respect to property taxes.
The column titled Cost per Day Relative to the National Average shows a state-
by-state index of estimated per-day carrying costs per dollar of unpaid principal balance,
where the national average equals 100 percent. Those index values were derived from
separate estimates from each Enterprise, which FHFA weighted on the basis of the
Enterprises respective market shares in recent years.
The column titled Rank shows the total time to obtain marketable title
multiplied by the indexed per-day carrying cost. For each state, this product is indicative
of the relative total carrying costs upon which the agency would base its adjustments to
upfront fees under the planned approach. The states, District of Columbia, and territories
are ranked, with 1 representing the lowest-cost area and 54 the highest-cost area.
The first two factorsdays to obtain marketable title and per-day carrying
costsprovide estimates of the total carrying cost of a defaulted mortgage, by state. The
third factor used in the methodology is the expected national average default rate on
single-family mortgages acquired by the Enterprises. This was estimated using the
national book of business acquired by Fannie Mae and Freddie Mac in the first half of
2012. Since the national average default rate is used in the estimation, the upfront fees
that the Enterprises would impose on loans originated in certain states, under FHFAs
planned approach, are not affected by any variation that may exist at the state level in the
credit quality of loans acquired by the Enterprises, expected future house price
movements, or other factors that may affect the likelihood of loan default.
The methodology combines the three factors with appropriate rates of discount to
produce present-value estimates of expected total default-related carrying costs for a new
mortgage in each state. Those state-level estimates were produced separately by Fannie
Mae and Freddie Mac. FHFA weighted each Enterprises estimates by its respective
market share in recent years to produce a single set of estimates. FHFA then calculated
the standard deviation from the mean of the state-level estimates of expected total
default-related carrying costs, which was found to be 10 basis points.
The planned approach focuses on the small number of states that have expected
total default-related carrying costs that significantly exceed the national average and,
thus, cause the greatest increase in average loss given default. Based on current data,
loans in five states would be assessed upfront fees. The state between one and one half
and two standard deviations from the mean, Illinois, would have an upfront fee of 15
basis points. The states between two and three standard deviations from the mean,
Florida, Connecticut, and New Jersey, would have an upfront fee of 20 basis points. The
state more than three standard deviations from the mean, New York, would have an
upfront fee of 30 basis points.
This approach would allow for variation in practice among the states and impose
upfront fees only on those states that are statistical outliers from the rest of the country.
If those states were to adjust their laws and requirements sufficiently to move their
foreclosure timelines and costs more in line with the national average, the state-level,
risk-based fees imposed under the planned approach would be lowered or eliminated.
The approach recognizes that each state establishes legal requirements governing
foreclosure processing that it judges to be appropriate for its residents. It also recognizes
that unusual costs associated with practices outside of the norm in the rest of the country
should be borne by the citizens of that particular state rather than absorbed by borrowers
in other states or by taxpayers.
Future Changes to State-Level G-Fee Adjustments
The planned approach bases state-level adjustments to upfront fees on past
experience and a limited range of cost variables. FHFA would consider, in the future,
changes to its methodology to address additional variables. For example, these could
include estimates of the impact of recently-enacted laws and ordinances. Such
calculations would be based on experience with similar laws and ordinances and their
effects on per-day carrying costs. FHFA could also include a wider range of state actions
in its methodology. For example, FHFA could consider state laws and ordinances
affecting the disposition of acquired real estate following a default, commonly referred to
as real estate owned (REO), and address attendant costs created by state and local rules
that impose charges above a certain amount or impose duties that add to the costs of the
Enterprises. The Enterprises, therefore, could undertake revisions to their state-level g-
fees based on experience gained with additional measurement devices.
FHFA invites input from any person with views on the planned approach and on
potential future changes to state-level g-fee adjustments. In particular, FHFA is
interested in the following three questions:
1. Is standard deviation a reasonable basis for identifying those states that are
significantly more costly than the national average?
2. Should finer distinctions be made between states than the approach described
3. Should an upfront fee or an upfront credit be assessed on every state based on
its relationship to the national average total carrying cost, such that the net
revenue effect on the Enterprises is zero?
FHF A will accept public input through its Office of Policy Analysis and Research
REGISTER], as the agency moves forward with its deliberations on appropriate action.
Communications maybe addressed to FHFA OPAR, 400 Seventh Street SW., Ninth
Floor, Washington, DC 20024, or emailed to Communications to
FHF A may be made public and would include any personal information provided.

Edward J. DeMar ,
Acting Director, F deral Housmg Fmance Agency.